Posted by: Josh Lehner | June 21, 2017

Kids in the Basement, 2017 Update

Yesterday we looked at household formation in Oregon. Historically one key component has been young Oregonians leaving the nest after finishing school and/or finding a job. However, in the aftermath of the Great Recession we saw a larger share of young adults, both locally and across the country, living at home. Of course this was for logical reasons. Employment opportunities barely existed and a larger share returned to school in hopes of increasing their skills for better earning potential in the future.

However as the recession turned into recovery, which turned into expansion, the expectation was for these young Oregonians to begin to move out on their own. Nearly 3 years ago at their annual forecast breakfast I told the home builders that we had reached Peak Kids in the Basement. Well, I was wrong. We have not seen the share of young Oregonians living at home decline. At all.

What we have seen, however, is a shift in employment for those living at home. Previously the increase had been entirely among those without a job. The vast majority of that increase was due to larger enrollments in higher education, both full-time and part-time. In recent years we have seen a cyclical decline in non-employed young Oregonians living at home, but a corresponding increase in those with a job. So the economic conditions changed as expected, however the behavior did not. One key suspect as to why may be housing costs. High rents today may be a major hurdle to forming one’s own household or trekking out on one’s own, even with roommates. Additionally, given high rents, a young household has trouble saving money toward a down payment on a house. As such, living at home even while employed, allows for greater savings and financial flexibility. That said, I don’t have a full explanation for these trends.

Furthermore we have yet to see any rebound, cyclical or otherwise, when it comes to idle youth or boomerang college graduates. Keep in mind these subgroups are based on a very limited sample, so reading too much into them may be a fool’s errand.

One thing we do know is that some major life events, or milestones to adulthood, are shifting later into life over the past couple of generations. No, this isn’t a Millennial story per se. Rather, they are just the continuation of these trends.

Back in April, the Census Bureau released an interesting report called “The Changing Economics and Demographics of Young Adulthood: 1975–2016.” (HT: Tim Duy) The report goes through a lot of the data and trends among young adults. What I was struck by were three things in particular. First, when it comes to leaving the nest the report says:

local labor and housing markets shape the ability of young people to find good jobs and affordable housing, which in turn affects whether and when they form their own households. Apart from local markets, patterns in migration may help create geographic differences in young adult living arrangements.

 

When looking across states, the report finds Oregon’s share of young adults living at home is the 11th lowest in the nation. Now, the increase from before the Great Recession to today has been the same, we just have a lower rate overall. I suspect much of that is due to our strong in-migration flows. It is hard to move to a different state and still live at home, obviously.

Second, Census compares what age most people say is the right time to complete these various milestones to adulthood and what share of the population actually does so by that age. See the two farthest right columns in the table below. For example, the ideal age for completing school and finding a full-time job is 22 years old. However only about one-half and one-third of young adults have actually done that by age 22.

Third, there has been an increase in so-called idle youth among the older Millennials living at home (25-34 years old). Census reports about 1 in 4 of this group are neither working nor enrolled in school. The report goes on to say that such individuals are more likely to have lower levels of educational attainment, which makes economic sense. However, Census also notes such individuals are also more likely to be disabled, and/or have a child. Either of which does make it harder to find work, and live on one’s own. Not all of the increase in young Americans living at home can be attributed to the economy. Some is due to life circumstances, evolving behavior and the like.

In conclusion, the share of young Oregonians living at home has not changed in recent years. Given that a larger share of those living at home now have a job, I do suspect there will be some cyclical decline moving forward as the economic expansion continues. Rising incomes and slower rent increases are also supportive of stronger household formation and stepping out on one’s own. However, at some point the proof is in the pudding. We’re clearly not there yet.

Note: While I was wrong in my 2014 housing prediction — and I felt confident in it — I was right in my 2015 housing prediction (Peak Renter), which I was much less confident in. There was no real 2016 housing prediction unless we can count the Housing Inflection Point.

Posted by: Josh Lehner | June 20, 2017

Oregon Household Formation and Housing Outlook

Household formation, or the number of new households each year, is a key economic indicator. It represents more people finding jobs, stepping out on their own and the like. It can also be thought of as a gauge of economic confidence or security. Most people do not trek out on their own — renting an apartment or buying a home — unless they feel reasonably secure in their ability to make rent or pay the mortgage.

The Great Recession effectively stopped household formation in its tracks. Jobs were scare and household incomes declined. More individuals and families doubled up in apartments, fewer Oregonians got married and the birth rate fell even further. However, as the Oregon economy transitioned from recovery to full-throttle growth a couple years ago, so too did household formation. The number of new households formed across Oregon in recent years is the largest in more than 20 years. The combination of more people with a job, rising household incomes, and the return of migration flows is driving new household formation here in Oregon.

Note: The chart below shows the number of households in Oregon from both the monthly Current Population Survey which has a small sample size and, where possible, the decennial Census and American Community Survey, which have much larger sample sizes. In recent years the CPS shows more households than the ACS and the gap is growing somewhat. As such, take the latest CPS readings with a grain of salt as they may overstate the household growth to some degree. However, we do know population growth, as reported by both Portland State and Census, has accelerated in recent years. Household formation has too, the question is to what degree given the differences in the available data.

Overall this is great news for the Oregon economy, and the housing market in particular. Or at least it has been historically. A growing economy and population leads to more households, driving demand for housing units and household furnishings which leads to more new construction. More new construction leads to more jobs and wages, and a reinforcing virtuous cycle ensures. However, new construction hasn’t kept pace this cycle. In recent years, household formation in Oregon is around 30,000 per year but housing starts are totaling just under 20,000 units per year.

Now, a temporary mismatch between supply and demand is to be expected. Demand can change overnight, and certainly does with the business cycle, however supply cannot. It takes time for builders to find a property, get financing, get permits, and build. However the supply side of the market usually does get going and tends to overbuild somewhat (at times a lot). The fact that we haven’t quite reached this stage of the housing market yet is what has many economists worried. Lack of supply and the reasons why, are the fundamental drivers of the tight housing market today. That said, there is a case to be made that multifamily construction in Portland’s urban core is now sufficient to hold down rents, even as total construction remains at low levels relative to population growth and household formation. The same cannot be said for other parts of the state just yet.

In terms of the outlook, our office expects some moderation for the tight housing market in the coming years for at least three reasons. First, new construction will continue to increase. Vacancies are low, prices are rising and so too is demand (household formation). Market conditions continue to be supportive of new construction. That said, we do not have robust housing start growth built in. However, another couple years of solid gains is to be expected.

Second, population growth, and therefore household formation, will slow. There is a clear statistical relationship that population growth follows trends in employment. The full-throttle economic growth here in Oregon a couple years ago meant that population growth ramped up as individuals and families moved in search of those more-plentiful job opportunities and our high quality of life (see the Housing Trilemma for more). Now that the economy is slowing, transitioning down to a more sustainable rate, so too will migration flows. In fact, according to our friends at ODOT, the number of surrendered driver licenses at the DMV has already peaked, which traditionally has been a very good leading indicator for population growth.

Third, when it comes to the housing market and affordability, household income gains are beginning to make a difference. Income growth for those in the middle and bottom part of the income distribution is picking up. While affordability has yet to improve, it has stopped getting worse for many Oregonians.

Continued increases in new construction, coupled with slowing population gains and rising incomes are the ingredients for improving housing affordability in the coming years. We are not there yet, but between now and the next recession, that is what our office’s baseline outlook contains.

Stay tuned, later this week I will have an update on Kids in the Basement, or the share of young Oregonians living at home. 

Posted by: Josh Lehner | June 16, 2017

Willamette Valley Household Incomes (Graph of the Week)

This edition of the Graph of the Week highlights improving household incomes here in the Willamette Valley. While it was included in the Salem outlook slide deck posted the other day, it deserves to be pulled out. As we have discussed numerous times lately, the tight labor market has begun driving many positive economic trends. The share of the working-age population with a job today is back to where it was last decade. Wages are rising across all industries and across all regions of the state. This combination — more people with jobs, and wage gains — is driving household income gains for those in the middle and bottom part of the income distribution. These households only have wages and the safety net in terms of income and purchasing power. They are fully reliant upon a strong economy to generate any sort of gains. The economy is now fully into this phase of the business cycle where such gains are finally being realized. Furthermore, income growth is and will help with housing affordability too.

Note: the reason I am using 2 year moving averages here is due to the noise or volatility in some of this data, as reported by the Census. This is particularly the case for Corvallis, and a little bit with Salem. Mathematically it works out, of course. However, in terms of the eyeball test, the average looks to undersell the improvements in the Albany MSA (Linn County). Albany has seen growth in its median household income from the worst of the recession.

Posted by: Josh Lehner | June 14, 2017

Salem’s Economic and Housing Outlook (Slides)

Salem’s economy is booming and has great forward-looking demographics. Job growth in recent years is across all industries and is the strongest the region has seen in 25 years. However, like the rest of the state and much of the nation, housing affordability is a big concern. I have given a couple local presentations in recent months, and will be focusing on housing today at a SEDCOR Economic Business Forum lunch. Below I have combined our office’s Salem-specific work with a few of the most important statewide economic trends. These slides focus on many of the same topics and issues we regularly discuss in our forecast documents and here on the blog, however with a local twist for those interested.

 

Previously I posted slides from a Corvallis and Albany presentation I did last year. In the near future I will share recent work I have done for Bend and Eugene as well. It should also be noted that our office’s regional work is best thought of as a complement to the regional work done on a daily basis by our friends at the Oregon Employment Department. Here in the mid-valley, see the articles and presentations that regional employment economist Pat O’Connor had done recently, along with the local workforce analyst Will Summers.

Posted by: Josh Lehner | June 7, 2017

Oregon Recreational Marijuana Forecast

SB 845, among other things, would give our office the recreational marijuana forecast responsibility. While not current law yet, we went ahead and produced such a forecast for the first time in our most recent quarterly forecast. What follows below the fold is an extended summary of our forecast work, including lots of pictures, I mean charts, for those interested.

Keep reading for more on the recreational marijuana outlook

Posted by: Josh Lehner | May 31, 2017

About that #1 Revenue Growth…

You’ve seen it, I’ve seen it, we’ve all seen it. Oregon leads the nation in revenue growth. It sounds reasonable doesn’t it? Oregon’s economy is more volatile overall and generally outperforms the typical state. In recent years we’ve been Top 10 for employment, personal income, and state GDP growth, so naturally revenues would follow suit. Well, not so fast. The broad point that Oregon revenues are doing better than most states is true, but the magnitude of the changes and the exact state ranking is incorrect.

Let’s start with the Pew “analysis” that is the source of the maps and charts comparing state revenue growth. Hmm. The Oregon data just looks … off. The type of jump seen in 2015 — nearly 30% overnight — just doesn’t happen. Possibly something like oil-related revenues in Alaska or Texas may, but we know Oregon’s General and Lottery Funds didn’t increase that much. So what happened?

Well, if you look at the underlying data published by Census you see the same thing. Pew just copies and pastes the data from Census and does an inflation adjustment. It turns out the jump is caused by a massive increase in Occupation and Businesses License Taxes, or code T28. In speaking with the folks at the Census Bureau this includes: tire disposal, hazardous waste, petroleum load, and dry cleaners fees. How on earth could those increase overnight to become Oregon’s second largest revenue source, trailing only personal income taxes? Well, they can’t. And they didn’t. Turns out there is a coding error and the data is incorrect.

I know it’s not as sexy as being number one, but it looks like Oregon should probably be number nine. If you strip out the T28 revenues — Census is working on revising the data and will do so in the relatively near future — and compare Oregon’s trends you get the adjusted graph below. There is no question that Oregon’s revenues have seen better growth overall than the typical state because our underlying economic growth has been better. We just haven’t done an order of magnitude better than the typical state. This modified ranking places us a little behind California and a little ahead of Washington, which sounds just about right.

Additional Notes:

– The Census Bureau tries their best to pull all this information together. It is a very hard task to do and issues arise. Our office knows because we act as at least part of the clearing house for the Oregon data. It comes from many different places and sources. Our office has had issues trying to get this together and out the door. We have made mistakes and also not been able to complete all the line items in a timely manner in the past. We are trying to figure out a better process to ensure more complete and more timely reporting to Census. So our hands here aren’t entirely clean either.

– In talking with Census and our counterparts in other states, it is clear that every state has some idiosyncratic events that impact their revenue flows. It makes it hard to do some of the work that folks like Pew are trying to do for this reason. You really need to try and understand local issues (tax structures, base calculations, exemptions, etc) to understand these bigger trends. Employment and income comparisons are easy. State and local taxes are not. For example, as I noted in the last chart above, Oregon’s kicker payouts cause large year-to-year changes that aren’t indicative of the underlying economy or broader revenue trends.

– All of this said, the jump in the 2015 Oregon data should have set off some data analyst’s Spidey sense. For folks like Pew, trying to upgrade their state comparison work, something like that would be a natural place to dig into the data to understand what is happening. Figuring out why different states are seeing better or worse growth would add tremendous value. They’re just not doing it now, nor did they previously when looking at state revenue forecasting.

– Lastly, there are two general statements about state revenues making the rounds. The first talks about changes from before the Great Recession through today. This is the correct way to look at the situation. The second one compares revenue growth from the depths of the crisis through today, measuring growth just in the expansion to date. This is neither a good nor useful way to measure revenue growth. Some states and some revenue streams are more volatile. Only measuring changes over part of the cycle simply muddies the water and does not lend itself to being helpful.

Posted by: Josh Lehner | May 24, 2017

States at Full Employment, A Prime-Age EPOP Story

The key economic question economists are trying to answer today is whether or not the U.S. economy is at full employment. Given it is more a concept then a hard calculation, you look for signs in the data that suggest the economy is there. In terms of jobs and the unemployment rate, there is no question the data do suggest this. However, at least nationally, wage growth is still relatively slow, albeit picking up some, and inflation remains consistently below target.

Here in Oregon we’re checking more of the boxes than the U.S. overall. Not only have we seen stronger wage gains, but we got the labor force response in terms of rising participation rates. Furthermore, now that the labor market is tight, we are seeing slower job growth which is also expected. Again, I don’t think we’re quite there just yet, but in looking across the nation it’s clear that Oregon is closer than most states.

Speaking of the other states, our office and a host of economists across the region are currently in Bend this week for the annual Pacific Northwest Regional Economic Conference (PNREC). I know, it’s a hard job at times. Mark is giving the U.S. Outlook talk so we’ve been digging into the region and other states a bit more. Similar to the national data, the vast majority of states are currently at or near a record-high number of jobs and the typical state’s unemployment rate is back down to where it was prior to the Great Recession. However, fewer states are fully healed in terms of deeper measures of labor market health.

Specifically, when it comes the share of the prime working-age population that actually has a job, those between 25 and 54 years old, just two — two! — states are back to where they were last decade, let alone the late 1990s.

Focusing just on the prime working-age population is a really good way to strip out the impact of the aging demographics. This age group also has the highest labor force participation and employment rates. And by looking at rates, or shares, you control for any population growth at the same time. Right now, across the nation the employment rate (or employment-population ratio, or EPOP for short) for this group is 2 percentage points lower than prior to the Great Recession. Both Adam Ozimek of Moody’s Analytics and Nick Bunker of Equitable Growth have been highlighting these trends in recent years as a key barometer of the economy. In fact, Adam was just on Bloomberg TV earlier this week. He pointed out some of his recent research showing that there is still room to run based on the prime-age population and also the fact that there has been a stronger labor force response in states with faster wage growth. Sound familiar?

The map below shows how each states’ prime-age EPOP compares today relative to their pre-recession peak employment rate. Just two states have a higher EPOP today and only a handful of other states are relatively close, Oregon included. The vast majority of the states have considerable room for improvement.

Note: The state level data comes from the household survey which can be noisy due to its relatively small sample size. This can especially be true once we parse the data further and focus just on the prime-age population. Take the specifics with a grain of salt.

Since we’re at PNREC, I wanted to focus on the region for a minute which I think is illustrative of what the nation is facing as well. The charts below compare the employment rate, or employment-population ratio across the entire age spectrum for the core PNW states. We previously did this just for Oregon and found that the employment rates for all ages in Oregon were back to pre-Great Recession rates. Our neighbors’ patterns differ.

Idaho is largely back except for employment rates for Idahoans in their 40s and 50s. This is exactly where Oregon was in 2015. The concern here is that this gap may be structural based on skills or geographic mismatches or age discrimination in the hiring process. Given Oregon’s middle-age gap has now closed, structural issues may be less of a concern than initially feared. As the labor market gets tight firms must cast a wider net when hiring. They must dig a bit deeper into the resume stack and hire those with an incomplete skill set or a gap in their resume due to long-term unemployment and the like. That’s happening nationally and here in Oregon. I expect it to happen in Idaho too. Montana and Washington are seeing some of these same trends, albeit their prime-age EPOP isn’t back nearly as much. Montana was making progress until the oil crash in late 2014 set them back, along with the other energy states and Canadian provinces. 

Finally, for those interested in how your state or region is doing, check out the slides below. They include comparisons across a host of labor market indicators including prime-age EPOP.

 

Posted by: Josh Lehner | May 16, 2017

Oregon Economic and Revenue Forecast, May 2017

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary.

The U.S. economic expansion marches on, as does Oregon’s. Next month marks the eight anniversary since the end of the Great Recession, making the current expansion the third longest since World War II. The good news is nearly all signs point toward continued growth in the near-term. Even so, there do remain significant risks to the outlook, particularly the uncertainty of federal policy.

In recent years Oregon’s economy has been among the ten fastest growing states nationwide. That said, Oregon job growth has slowed considerably in recent quarters. While this slowdown has been built into our office’s outlook for years, the severity of the slowing has been more than expected. No longer is the state adding jobs at nearly twice the national rate. Over the course of the 2017-19 biennium, Oregon is expected to continue to see healthy jobs gains – a bit more than 3,000 per month – and enough to keep pace with a growing population.

It is quite clear Oregon’s growth has slowed, however, the rest of the economic and revenue data suggest the employment numbers may overstate any weakness. Oregon’s economy is hitting the sweet spot, which only happens at or near full employment. Wages for workers are rising faster. In a tight labor market, firms must cast a wider net to fill openings. As such, job candidates who were previously passed over when unemployment was high are now finding work, this includes middle-aged Oregonians, the long-term unemployed, and the like. Importantly, these factors combine to generate strong household income gains in recent years. As such housing affordability has largely stopped getting worse, and poverty rates and needs-base caseloads are falling.

As the peak season for income tax collections winds down, it has become clear that Oregon has enjoyed a good year. Although revenue trends are not as strong as what was seen earlier in the economic expansion, Oregon and its Western neighbors continue to lead the way in terms of revenue growth. A large majority of states are dealing with disappointing revenue growth that has failed to match their budget projections. In Oregon, revenue growth has outstripped expectations, putting our unique kicker law into play.

Although revenue growth is still healthy, the slowing pace of Oregon’s expansion has become evident in tax return data just as it is has in the jobs data.  Income growth has been cut in half over the past two years, with slowing across a wide range of income types. While still growing for now, business, retirement, investment and labor income have all decelerated rapidly.

With increases in the outlook for personal income taxes, estate taxes and lottery sales, net General Fund resources are up $370 million relative to the March forecast.  Excluding corporate taxes, General Fund revenues are now 2.4% above the 2015 Close of Session estimate. If this holds through the end of the biennium, an income tax kicker of $408 million would be triggered for tax year 2017.

Although the May outlook calls for a personal income tax kicker, it is not a sure thing. Large swings in the forecast between now and the end of June have been commonplace in past years. In fact, if revenue forecast errors are distributed on a bell curve, the forecast would be expected to decline by more than the $70 million needed to fall below the kicker threshold in one out of every three years.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | May 9, 2017

Zombie Unemployment Rate Claims

Oregon currently has a record low unemployment rate, with good data going back to 1976. It’s true that this likely overstates the strength in the economy, however we know the labor market is tight and Oregon is at or near full employment. I think we’re close but not there yet, however you can make a reasonable argument we are.

What is not true are those claiming the unemployment rate is low because it only counts those receiving unemployment insurance benefits. This is clearly a zombie idea — something that should die in the face of all evidence and data, but somehow manages to stumble forward forever. The claim is made in good times and in bad, but is equally misguided. When the unemployment rate began declining following the Great Recession, the claim was used to say that it only reflected individuals who exhausted their benefits and gave up looking. While this certainly applied to some individuals, the return of job growth was the key driver in those initial unemployment rate declines.

So why is it a zombie idea? The unemployment rate comes from the household survey, where they ask if individuals have a job, and if not, whether they have looked for one recently. If you say you do not have a job but are looking, you count as unemployed. Whether or not you receive unemployment insurance benefits is not a deciding factor here at all. That said, those who receive benefits are generally unemployed, but not all unemployed receive benefits. You can see this in the chart below.

Over the past 3-4 years, when it comes to unemployed Oregonians, the number of new entrants into the labor market looking for work has been equal in size to the number of Oregonians who have lost their jobs but want another one.

Now, it is always true that the longer you remain unemployed, the lower the probability of finding a job. In fact, the long-term unemployed are more likely to give up looking for work then to find a job. However that relationship is getting better in a stronger economy as the job finding rates are picking up. Note that the chart below is based on U.S. data.

This pattern, where longer-term unemployed are more likely to give up looking is a huge concern and the longer and deeper a recession, the higher the possibility or probability of permanent damage. The fact that the U.S. economy has been operating below full capacity for much of the past 17 years is a big deal and likely has resulted in some permanently lower labor force participation rates.

The best way to test whether or not this is true, is to run a strong economy. In a tight labor market, firms not only must compete on price (wage) to attract and retain the best workers, they also have to cast a wider net when looking to fill positions. Right now, the Oregon labor market is tight. Firms are generally no longer flooded with job candidates with sparkling resumes. The state’s Employment-to-Population ratio for all prime-age cohorts is back to where it was in 2007. As such, the vast majority of people who want a job, have a job, hence the low unemployment rate. In casting that wider net, employers are hiring individuals who were previously long-term unemployed, have an incomplete skill set that requires more on-the-job training, and the like. Overall these are very good dynamics to see in the economy. But they generally only happen at or near full employment.

Posted by: Josh Lehner | May 5, 2017

Graph of the Week: Boomers and Millennials

Articles bemoaning the habits, trends and beliefs of younger generations are a time honored tradition. The Millennials are certainly no exception. As they continue to age into adulthood, Millennials will reshape many aspects of society and the economy. However probably less than many of the so-called think pieces predict. There is a reason our office calls the 25-34 year age group the root-setting years. It is when most individuals settle down, begin their careers in earnest, get married, buy a house and have kids. While Millennials may be doing this a couple years later than past generations, they are still following the same general life cycle of behavior.

All that said, when it comes to demographics the Boomers were different. We can lose sight of this fact today now that Millennials and Gen Z or whatever we end up calling those after the Millennials are similarly large in size. However back in 1980, Boomers were essentially in the same age groups as Millennials today, and they represented a significantly higher share of the population. As such, while trends and behaviors of Millennials will reshape society, the marginal change is unlikely to be as large.

Note: There is a standard definition for Boomers. They were those born between 1946 and 1964. No such standard exists for Millennials. Most analysis use somewhere in the 1980-1983 to 1997-2000 range. I use 1981-2000. That does mean Millennials get one additional year in their group, but it does not impact the analysis much. That extra year is worth about 1.2% of the population distribution. 

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